Tuesday, November 6, 2012

Professor Quiggin Could Learn a Lot from My Book

I recently criticized Paul Krugman's recent book for ignoring marginal tax rates, which were hiked by the stimulus law and would be further hiked by the bigger stimulus that he proposes in his book. Moreover, I asserted that high marginal tax rates are responsible for a lot of the U.S. labor market's recent depression, and that Krugman's plan would have depressed it further.

The very recent (last 6 months or so), withdraw of some of the 99 weeks of UI benefits proves that marginal tax rates don't matter, and

"As for food stamps, the expansion in the number of recipients is not due to changes in policy."

All of these points are addressed in my book, before Professor Quiggin even wrote them. Even if he had not read my book, a little investigation would have quickly shown him that his claims are incorrect. I take the points in reverse order.

3. SNAP (aka, food stamps). Professor Quiggin has been repeatedly refuted by the US Department of Agriculture (it administers SNAP), most recently in its Sept 2011 report where it says "The continued growth in SNAP participation from 2009 to 2010 is likely attributable to the slow recovery from the recent economic recession, expansions in SNAP eligibility, and continued outreach efforts." [emphasis added] My book agrees that all three were a factor, provides estimates of their separate quantitative importance (Table 3.4), and discusses the academic literature on the subject.

One way to quickly see how Professor Quiggin is wrong about food stamps is to look at SNAP participation as a ratio to either (a) persons in poverty, (b) persons on Medicaid, (c) persons on SSI, or (d) persons on SSDI. Of course a "bad economy" expands participation all of these things, but why would SNAP grow so much more than the others? The answer is simple: SNAP policy changed, while the definition of poverty was constant and the policy rules for Medicaid, SSI, and SSDI were relatively constant.

2. 99 weeks no more. As of October 2012, unemployed people could not collect 99 weeks UI, thanks to UI rule changes going into effect this spring. But they still could collect 60+ weeks, not to mention remain on Medicaid, SNAP, and other programs indefinitely. My book quantifies all of these factors, and finds that the difference between 60+ weeks and 99 weeks (actually, 96 weeks was the national average) is real but fairly small (extending UI from 26 to 52 weeks is a big deal). So my model predicts that, adjusted for age and other factors, the labor market would rebound slightly during 2012, which is exactly what happened. (There are also issues of timing here, which are discussed in my book).

3. Austerity depresses the economy. I agree (see also here) that European governments have typically failed to revive their economies, and probably further depressed them. But austerity is not opposite of redistribution (ie, hiking marginal tax rates). Think of how austerity might be implemented in the U.S.: we might cut Medicare and Social Security, but only for the more successful beneficiaries. Regardless of whether redistribution is achieved by withholding benefits from families with high incomes, providing more subsidies to families with low incomes, or both, an essential consequence is the same: a reduction in the reward to activities and efforts that raise incomes. Many kinds of austerity enhance redistribution, and that’s an important reason why austerity depresses the labor market.

With that said, I am very much in favor of cross-country comparisons. I would love it if Professor Quiggin or anyone else measured marginal tax rate time series for any country that we could compare to my series for the U.S. But Professor Quiggin has failed to do that, and instead claims without evidence that marginal tax rates were constant (or falling) everywhere outside the U.S.

Finally, if marginal tax rates were found to be constant in Estonia (the only specific country that Professor Quiggin points to), does that mean that marginal tax rates do not matter in the U.S.? Please let me know so I can notify American economists that Estonia is our ideal laboratory, and notify policymakers that they can safety hike marginal tax rates to 100 percent without noticeable consequences.

Added: I have heard the claim that the ratio of SNAP to Medicaid increased so sharply because Medicaid was cut sharply, rather that SNAP changing its rules. The claim ignores the help that Medicaid got from ARRA and, more important, that Medicaid spending and participation per person in poverty was pretty flat. Why don't the allegedly sharp Medicaid cuts result in sharply less Medicaid per person in poverty? The answer is simple: Medicaid cuts, if any, where nowhere near the magnitude of SNAP expansions. For more on SNAP expansions, see The Redistribution Recession.

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Supply and Demand (in that order)

The basic tools of supply and demand help immensely to understand and predict everyday events in our world. These days, many of those events are related to the Redistribution Recession of 2008-9. But I also look at other issues related to fiscal policy, labor economics, and industrial organization.